We attended the 8th Annual Shopping Malls Conference 2018 hosted by Trueventus (an International Event Planner), which was well attended by 150 delegates from all over the world, and mostly comprised of shopping malls management representatives, and real-estate consultants. Shopping Malls being a complex of shops are under pressure to change and the ever-changing technological trend (i.e. e-commerce, Artificial Intelligence, Internet of Things, Robotics and Fintech) has a huge impact on consumer expectations on how the malls should position themselves. The Malaysian Government has vouched for the importance of digital marketplace by setting up Digital Free Trade Zone (DFTZ) (full launch in 3Q18) in collaboration with Alibaba Group, pushing boundaries further for the local companies to compete in the global market. We believe that shopping malls under our coverage, AEON (OP; TP: RM2.60) and PARKSON (OP; TP: RM0.810) have been exploring the opportunity to widen their reach into the digital space such as AEON Maxvalue supermarket tieups with Honestbee (Singapore based e-Marketplace) to do on-demand delivery of grocery items. Concertedly, the outlook for retail REITs are not exciting due to increased supply of retail space and shifting demand as e-commerce continues to bite into the market share, thus, capping strong rental reversions over the long run. To stay relevant, mall managers need to adapt to the rapid changes in the retail environment to integrate and animate shoppers’ experience. However, we do believe landmark malls would fare better than neighborhood malls due to better footfall traffic. Maintain NEUTRAL on Consumer and MREITs.

Day 1- The retail disruption. Rapid technoligical advancement (i.e. e-commerce, Artificial Intelligence, Internet of Things, Robotics and Fintech) has a huge impact on consumer perception of shopping malls position as the main shopping destination. Correspondingly, the shifting in demand to plaftforms, which continues to bite into the market share of physical stores, have completely distrupt the normal physical business especially during the major festive celebration. For example, during 24-hour period of Alibaba group “Single’s Day” event, Alipay procesed record-breaking 1.48b payment transaction valued at USD25.3b, which unrivalled by normal physical stores to compete in that short time-frame. From the local courier perspective, GDEX average parcel sorting capacity doubled to 120,000 parcels per day (from 60,000 parcels per day in 2013) in line with the growing local e-commerce market (i.e Shopee, Lazada, 11th street, Mudah.my and Carousell). Ultimately, the shopping malls should reimagining their physical retail space for an experiece that only physical stores can offer by exploring into the new retail trend such as retailtainment, active entertainment, grandeur entrance, mixed developments, unique dining options as well as combining physical space and digital space through Online-to-Offline (O2O) retailing.

Day 2-The new retail evolution. The evolution of retail revolved around the Cashless Commerce (e-commerce), Smart Shopping, and New Reality. Shopping malls should be designed within these parameters through “Experience Design” which is based on a simple idea that everything a business does when designing products, processes, services, events, cultures, places and spaces has the focus placed on the quality of human experience. On another note, Lazada speaker and regional CEO, Will Ross, enlightened that Southeast Asia’s (SEA) digital economy is growing rapidly, but e-commerce penetration rates are still only at 4% of total SEA retail sales which still below the penetration rates in the USA and China of approximately 14%. The Malaysian Government has vouched for the importance of digital marketplace by setting up Digital Free Trade Zone (DFTZ) (full launch in 3Q18) in collaboration with Alibaba Group, pushing boundaries further for the local companies to compete in the global market. Eventually, both shopping malls and e-commerce has to co-exist together by combining the traits of physical stores (as physical viewing, inventory storage, and pick-up point) and the traits of boundless digital space to widen the reach.

REITs - Landmark malls expected to fare better on higher footfall traffic. Retail REITs under our coverage have been grappling with unexciting single-digit reversions over the past 3-4 years, from the heydays of double-digit reversions previously. Moving forward, reversions are expected to remain within the single digit’s as retail REITs brave the shifting demand of ecommerce biting into market share, on the back of increased supply of retail space. To address the gaining prominence of ecommerce, mall managers are working on adapting to the rapid changes in the retail environment by animating and integrating the mall experience with technology to enhance the consumer experience, while we also notice a growing trend shifting from the “large anchor tenants” into more mini anchors and themed and concept plays with niche tenants. Refurbishment and repositioning is a gradual and ongoing process for most REITs but this is especially evident from the recent refurbishment and rebranding plans at CMMT’s Sungei Wang Plaza and the repositioning of 3 Damansara. Furthermore, most REITs are upping their online presence by beefing up their websites and including mobile phone applications for malls to update shoppers on latest happenings and tenant promotions. Over the longer run there are talks of establishing in-house online portals that supports tenants to market their products and services to reach a wider market. All in, we believe the outlook for retail REITs are challenging but we believe landmark malls (i.e. PAVREIT, SUNREIT, KLCC, IGBREIT) will continue to weather the storm better due to higher footfall traffic (vs. neighbourhood or suburban malls), and tenants preference to maintain a presence at these malls. This is proven by the fact that landmark malls under our coverage have been commanding close to maximum occupancy of 95-100% vs. domestic retail occupancy of c.80%, and on positive reversions. All in, we make no changes to MREITs’ earnings and valuations. Maintain NEUTRAL on the sector.

Consumer-Local Retailers evolved in capturing the market share. We believe that shopping malls under our coverage, AEON (OP; TP: RM2.60) and PARKSON (OP; TP: RM0.810) have been exploring the opportunity to widen their reach into the digital space such as AEON Maxvalue supermarket tying up with Honestbee (Singapore based e-Marketplace) to do on-demand delivery of grocery items. Concurently, AEON and PARKSON have been renovating their malls for a modernized look, adding a variety of dining options, expanding unique physical attraction (i.e Cinema, indoor playlands and technological centre) as well as changing their products postioning layouts to entice better physical shopping experiece. On the other hand, the tenant inside the malls such PADINI (UP;TP:RM5.60) also has online presence through official website as well as through third party e-marketplace. Furthermore, retailers are also using their chain of stores as a pick-up place for emarketplace, as practised by MYNEWS (UP; TP: RM1.25) through Pgeon delivery service and 7-Eleven Malaysia (MP; TP: RM1.55) through their BOXiT parcel locker service where consumer can make purchases online and have the items delivered to the nearest lockers in their respective chain of stores. All in, we make no changes to Consumer sector’s earnings and valuations. Maintain NEUTRAL on the sector.

Source: Kenanga Research - 5 Sept 2018